What is Pass-Through Income Tax

One of the highlights of the Tax Cuts and Jobs Act of 2017 is the new treatment of pass through income.

What is Pass Through Income Tax?

Pass-through income is business income that is “passed through” and taxed at a taxpayer’s individual income tax rate. This contrasts with the treatment of a business structured as a C corporation, whose income is taxed at a corporate tax rate.

WHAT’S NEW?

New federal law now allows taxpayers to deduct a portion of pass-through business income on their tax returns. Joint filers with income up to $315,000 (and single filers up to $157,500) can deduct 20% of this type of taxable income starting in 2018. The deduction is more complicated for tax filers above that threshold, because it’s limited to the greater of 50% of the business’s W-2 wages or another calculation that includes the cost of acquired property — or 20% of their business income, if that’s less. The deduction phases out between $315,000 and $415,000.

WHO GETS IT?

Any sole entrepreneurship or business structured as a limited liability company (LLC), partnership or S corporation.

BY THE WAY

The tax savings this pass-through provision offers taxpayers won’t necessarily apply to state taxes, which may continue to use different formulas to determine your state tax liability.